ACTUARIAL EFFECTSThe bill relates to the resumed monthly annuity payments for Texas Municipal Retirement System (TMRS or System) retirees who choose to return to work for the municipality from which they first retired. The bill would provide an adjustment to the resumed monthly annuity payments after a suspension of these payments during reemployment to reflect "the accumulation of interest." There would be an additional interest adjustment to a lump sum benefit payable to reemployed members who returned to work after their initial retirement of eight years or more.
The bill refers to the accumulation of interest, but it does not state what the principal is that the interest is computed on. This omission has led to
two potential interpretations as outlined below.
The
first interpretation provided by TMRS is that the actuarial value of the principal amount of suspended benefit payments plus the interest thereon (plus more, if a COLA applies) would be restored to the member at re-retirement. This interpretation is reflected in the TMRS actuarial analysis.
According to the TMRS actuarial analysis, there are currently 240 members who have returned to work for the TMRS municipality from which they retired. If all 240 of these members receive the re-calculation under the bill, it would increase the unfunded actuarial accrued liability (UAAL) system-wide by approximately $18.5 million. Also, the actuarial analysis states that the bill could change retirement behavior in a way that would increase costs. The actuarial analysis estimates that the bill could increase the UAAL by up to $826 million.
The
second interpretation provided by Pension Review Board (PRB) is that the actuarial value of only the interest on the principal amount of suspended benefit payments would be restored to the member at re-retirement (the principal of the suspended payments would not be restored to the member at re-retirement). Therefore, the principal on which the interest would be computed is the total of suspended annuity payments corresponding to the duration of the reemployment period.
Additionally, PRB believes that the provision to increase the lump sum, with interest on the suspended payments, payable to certain reemployed members (who returned to work after their initial retirement of eight years or more) under Section 852.108 (j) in the bill is essentially duplicative. The interest proposed to be credited under this provision would have already been credited to these members under the previously discussed provision of the bill.
The PRB actuarial review states that TMRS is currently actuarially sound. The bill, if enacted, would not make the system actuarially unsound. However, TMRS' actuarial soundness is due to the contribution requirements it imposes on participating cities, and under TMRS' interpretation, there would be significantly increased contribution requirements. Even under PRB's interpretation, there would be benefit increases for currently reemployed members; thus the bill would have a cost, and would affect participating city contribution rates as well. Under the current PRB
Guidelines for Actuarial Soundness, funding should be adequate to amortize the unfunded actuarial accrued liability over a period which should not exceed 40 years, with 15-25 years being a more preferable target.
SYNOPSIS OF PROVISIONS
The bill would amend Government Code to provide an adjustment to the resumed monthly annuity payments after a suspension of these payments during reemployment to reflect "the accumulation of interest."
In addition, retirees who return to work at least eight years since the date of their initial retirement would accumulate interest on their suspended payments and those payments would be provided as a lump sum, with interest, when the member re-retires. This bill would take effect September 1, 2015.
FINDINGS AND CONCLUSIONS
Under current TMRS law, when a member returns to work for the municipality from which they retired, their annuity is suspended (suspended payments are forfeited by the member) while they remain re-employed. The member begins to contribute, along with a match from the employer, to a new account that will ultimately be annuitized as a new benefit and added to the original benefit once they re-retire. The original suspended benefit will be increased by any cost-of-living increases provided to retirees of the municipality during the suspension. For retirees who have a break in service of at least eight years before they return to work, the suspended payments are accumulated and provided back to the member once they re-retire. There is currently no interest earned on these suspended payments.
The TMRS actuarial analysis notes that the re-computation provision in the bill would be increased by any COLA increases received by the retired population during the time of re-employment. This would allow the re-employed member to receive a new benefit accrual equal to an active member plus the cost-of-living increases provided to the retired members. This creates a situation where a member who retires and then returns to work receives a higher annuity than if the member had continued working. Based on this assumption, the TMRS analysis estimates that if all current active employees would attempt to utilize this provision to receive a higher benefit, it would increase the UAAL of TMRS by up to $826 million.
The actuarial analysis estimates the following resulting city contribution requirements under the bill (aggregated by COLA provision):
|
Current |
Proposed |
Difference |
Number of TMRS Cities |
Estimated Annual Increase in Contribution Dollars (in millions) |
| None |
8.88% |
8.90% |
0.02% |
387 |
$0.5 |
| 30% CPI |
12.03% |
12.78% |
0.75% |
16 |
$1.0 |
| 50% CPI |
14.55% |
16.23% |
1.68% |
34 |
$11.9 |
| 70% CPI |
15.07% |
17.52% |
2.45% |
405 |
$68.3 |
| Total |
|
|
|
|
$81.7 |
*The above chart is based on the TMRS bill interpretation. The chart assumes that a member retires, then becomes re-employed and returns to work 30 days later. The actuarial analysis notes that the 100 percent utilization assumption in the above chart for current active members is likely an overly conservative estimate. However, the analysis states that the reemployment provision would be heavily utilized and would cause a material change to employer contribution rates.
The TMRS actuarial analysis also states that while it is unlikely that all current active employees would utilize the bill provision, many may try due to a higher annuity, which could change the retirement behavior patterns in the system. Any change in the member retirement behavior pattern could raise "bona fide termination" issues and related plan qualification issues under the Internal Revenue Code for the system.
The PRB actuarial review states that based on the TMRS bill interpretation, the material effect on member retirement behavior and contribution rates of TMRS cities is reasonable.
METHODOLOGY AND STANDARDS
The TMRS analysis relies on the participant data, financial information, benefit structure and actuarial assumptions and methods used in the TMRS actuarial valuations for December 31, 2013.
According to the PRB actuaries, the actuarial assumptions, methods and procedures used in the analysis appear to be reasonable. All actuarial projections have a degree of uncertainty because they are based on the probability of occurrence of future contingent events. Accordingly, actual results will be different from the results contained in the analysis to the extent actual future experience varies from the experience implied by the assumptions. This analysis is based on the assumption that no other legislative changes affecting the funding or benefits of TMRS will be adopted. It should be noted that when several proposals are adopted, the effect of each may be compounded, resulting in a cost that is greater (or less) than the sum of each proposal considered independently.
BACKGROUND
Established in 1947, TMRS is the statewide system that provides retirement, disability, and survivor benefits for employees of those Texas cities which voluntarily elect to participate in the system. Each of the 844 participating cities chooses a plan of benefits from the various options available under TMRS. (TMRS has an additional six inactive cities with no active members or employee contributions.) Each participating city's plan of benefits is funded separately through a combination of employee contributions, as a set percentage of compensation; employer contributions, which are annually determined for each city utilizing generally accepted actuarial principles and practices within the parameters established by the TMRS Act; and investment earnings. These funding requirements are the responsibility of the individual member cities of TMRS. TMRS does not receive funding from the State of Texas.
SOURCES
TMRS Actuarial Analysis by Mark R. Randall, MAAA, FCA, EA, Chief Executive Officer; and Joseph P. Newton, MAAA, FSA, EA, Senior Consultant, Gabriel Roeder Smith & Company, April 21, 2015.
PRB Actuarial Review by Robert M. May, FSA, EA, MAAA, Board Actuary; and Daniel P. Moore, FSA, EA, MAAA, Staff Actuary, Pension Review Board, April 22, 2015.
GLOSSARY
Actuarial Accrued Liability (AAL) • The portion of the PVFB that is attributed to past service.
Actuarial Value of Assets (AVA) • The smoothed value of system's assets.
Amortization Payments • The yearly payments made to reduce the Unfunded Actuarial Accrued Liability (UAAL).
Amortization Period • The number of years required to pay off the unfunded actuarial accrued liability. The State Pension Review Board recommends that funding should be adequate to amortize the UAAL over a period which should not exceed 40 years, with 15-25 years being a more preferable target. An amortization period of 0-15 years is also a more preferable target.
Actuarial Cost Method • A method used by actuaries to divide the Present Value of Future Benefits (PVFB) into the Actuarial Accrued Liability (AAL), the Present Value of Future Normal Costs (PVFNC), and the Normal Cost (NC).
COLA • Cost-of-Living Adjustment.
Funded Ratio (FR) • The ratio of actuarial assets to the actuarial accrued liabilities.
Market Value of Assets (MVA) • The fair market value of the system's assets.
Normal Cost (NC) • The portion of the PVFB that is attributed to the current year of service.
Present Value of Future Benefits (PVFB) • The present value of all benefits expected to be paid from the plan to current plan participants.
Present Value of Future Normal Costs (PVFNC) • The portion of the PVFB that will be attributed to future years of service.
Unfunded Actuarial Accrued Liability (UAAL) • The Actuarial Accrued Liability (AAL) less the Actuarial Value of Assets (AVA).